CenturyLink, Inc. (NYSE:CTL) shares are up more than 6.12% this year and recently decreased -1.78% or -$0.32 to settle at $17.70. Colony NorthStar, Inc. (NYSE:CLNS), on the other hand, is down -47.85% year to date as of 03/13/2018. It currently trades at $5.95 and has returned 1.54% during the past week.
CenturyLink, Inc. (NYSE:CTL) and Colony NorthStar, Inc. (NYSE:CLNS) are the two most active stocks in the market based on today’s trading volumes. The market is clearly enthusiastic about both these stocks, but which is the better investment? To answer this, we will compare the two companies based on the strength of their growth, profitability, risk, returns, valuation, analyst recommendations, and insider trends.
Companies that can consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Analysts expect CTL to grow earnings at a -12.70% annual rate over the next 5 years.
Profitability and Returns
A high growth rate isn’t necessarily valuable to investors. In fact, companies that overinvest in low return projects just to achieve a high growth rate can actually destroy shareholder value. Profitability and returns are a measure of the quality of a company’s business and its growth opportunities. We’ll use EBITDA margin and Return on Investment (ROI) to measure this. CenturyLink, Inc. (CTL) has an EBITDA margin of 33.8%. This suggests that CTL underlying business is more profitable CTL’s ROI is 2.90% while CLNS has a ROI of -0.40%. The interpretation is that CTL’s business generates a higher return on investment than CLNS’s.
If there’s one thing investors care more about than earnings, it’s cash flow. CTL’s free cash flow (“FCF”) per share for the trailing twelve months was -0.16. Comparatively, CLNS’s free cash flow per share was -. On a percent-of-sales basis, CTL’s free cash flow was -0.97% while CLNS converted 0% of its revenues into cash flow. This means that, for a given level of sales, CLNS is able to generate more free cash flow for investors.
Liquidity and Financial Risk
CTL’s debt-to-equity ratio is 1.61 versus a D/E of 1.59 for CLNS. CTL is therefore the more solvent of the two companies, and has lower financial risk.
CTL trades at a forward P/E of 14.71, a P/B of 0.67, and a P/S of 1.06, compared to a forward P/E of 34.20, a P/B of 0.47, and a P/S of 1.16 for CLNS. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
A cheap stock isn’t a good investment if the stock is priced accurately. To get a sense of “value” we must compare the current price to some measure of intrinsic value such as a price target. CTL is currently priced at a -10.83% to its one-year price target of 19.85. Comparatively, CLNS is -32.39% relative to its price target of 8.80. This suggests that CLNS is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.60 for CTL and 2.00 for CLNS, which implies that analysts are more bullish on the outlook for CTL.
Risk and Volatility
Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. CTL has a beta of 0.77 and CLNS’s beta is 1.16. CTL’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. CTL has a short ratio of 5.67 compared to a short interest of 2.15 for CLNS. This implies that the market is currently less bearish on the outlook for CLNS.
Colony NorthStar, Inc. (NYSE:CLNS) beats CenturyLink, Inc. (NYSE:CTL) on a total of 8 of the 14 factors compared between the two stocks. CLNS is more profitable, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. CLNS is more undervalued relative to its price target. Finally, CLNS has better sentiment signals based on short interest.